SoundCloud's Next Move Will Change the Streaming Game (Again)
Remie Geoffroi

In October 2014, against a backdrop of takedown orders and saber-rattling directed at the popular free streaming service SoundCloud, Universal Music Group ­chairman/CEO Lucian Grainge told the audience at the WSJD Live Global Technology Conference that there was an "opportunity for SoundCloud to create incredible revenue" -- provided the company could figure out a business plan.

Since it was founded in 2007 by Swedish musicians Alexander Ljung and Eric Walforss, SoundCloud has become ­enormously popular with artists, DJs and music fans for its simple interface, its social functionality and the ease and speed with which it delivers music to its 175 ­million users. But, despite the patronage of numerous top artists, from Kanye West to Drake, the company had been operating without licenses from most labels -- Sony Music had been particularly ­aggressive about removing its ­artists' music from the site -- and its losses were increasing much faster than its revenue, to the tune of $41.8 million before income taxes, depreciation and ­amortization, on revenue of $19.7 million in 2014. SoundCloud desperately needed contracts with labels in order to have a ­sustainable long-term business.

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Between November 2014 and January 2016, the Berlin-based company signed ­agreements with Warner Music Group, Universal and Merlin, the ­independent-label agency -- and on March 18 cleared the last hurdle by ­announcing an ­agreement with Sony Music.

As it negotiated with labels, SoundCloud was quietly ­developing a music-streaming subscription ­service, including a "paid tier" to exist alongside its free offering. Sources tell Billboard the service will launch in the coming weeks. Streaming is rapidly becoming the dominant model of the music business -- in 2015, for the first time, it was the largest source of U.S. recorded-music revenue -- and the launch of that service will plunge SoundCloud into a crowded pool of competitors dominated by Spotify and Apple (with 30 million and 10 million paid ­subscribers, respectively) and including Google/YouTube, Amazon, Tidal and soon Pandora, all of which are trying to convert users into paying ­subscribers. What can SoundCloud do to set itself apart?

For one, sources tell Billboard the service will allow the major labels to decide which of its songs are available for free -- a degree of control the labels want, but haven't been able to get, from Spotify. "The SoundCloud agreement gives us the opportunity, with our artists, to have flexibility with respect to how we make music available to fans," Grainge told Billboard in January. (Representatives for SoundCloud, Sony and Warner Music declined to comment.)

And, in a measure aimed straight at the dance music fans and ­musicians who make up the core of its audience, the company will offer a number of authorized, user-uploaded remixes and DJ sets on both tiers, utilizing innovative contracts that allow it to ­monetize ­content from the labels and publishers with which it has struck deals. SoundCloud will scan uploaded music to determine if it includes samples; if it does, any revenue generated will be divided among the relevant copyright holders. (Labels and publishers will still have the option to ask the site to take down music that involves their copyrights.)

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While the label control over the paid tier is a play to rights-holders, perhaps more crucially, the user-generated remixes help preserve SoundCloud's status as a music community. "The ­audience that is buying electronic albums and festival tickets is hanging out on SoundCloud," says James Collinson, head of Ninja Tune North America. "It's an artist tool and an artist community."

Still, the question remains: "Does the world need another streaming service?" as Russ Crupnick, managing partner of the MusicWatch consultancy, puts it. "It's going to be hard." And despite SoundCloud's enviable reach, how much of its generally young and tech-savvy audience will pay for music they mostly have been ­enjoying for free? "Looking at conversion rates, it's likely they'll end up with low single digits," says Mark Mulligan, an analyst at Midia Research, based on comparisons with other free services. But even a 5 ­percent ­conversion rate from SoundCloud's 175 million users -- 8.7 ­million -- would make it a serious player.

Sources at the majors say they're ­hopeful the remix-monetization deals will help set apart SoundCloud while ­maintaining the atmosphere that has made it so popular. "It's a very organic, user-friendly ­experience that's really social," says a major-label executive who has seen a ­demonstration that includes the paid tier. "It's true to the way SoundCloud works now."

This article was originally published in the April 2 issue of Billboard.